561 F.

2d 1382
77-2 USTC P 9659

In the Matter of ARMADILLO CORPORATION, Bankrupt,

and
Republic Drug Company, Bankrupt.
UNITED STATES of America, Plaintiff-Appellant-CrossAppellee,
v.
Charles W. ENNIS, Trustee, and Roger C. Gifford, Trustee,
Defendants-Appellees-Cross-Appellants.
Nos. 76-1514, 76-1515, 76-1516 and 76-1517.

United States Court of Appeals,

Tenth Circuit.
Submitted Aug. 5, 1977.
Decided Sept. 28, 1977.

Karl Schmeidler, Tax Division, U. S. Dept. of Justice, Washington, D. C.

(Scott P. Crampton, Asst. Atty. Gen., Denver, Colo., Gilbert E. Andrews
and Crombie J. D. Garrett, Tax Division, U. S. Dept. of Justice,
Washington, D. C., on the brief), of counsel; James L. Treece, U. S. Atty.,
and Carolyn J. McNeill, Asst. U. S. Atty., Denver, Colo., for plaintiffappellant-cross-appellee United States.
Mackintosh Brown of Fuller & Evans, Denver, Colo., for defendantsappellees-cross-appellants Ennis and Gifford.
Before SETH, HOLLOWAY and BARRETT, Circuit Judges.
BARRETT, Circuit Judge.

Appellant, United States, seeks review of the district court's determination of

the liability of trustees in bankruptcy for (a) employees' taxes represented by
withheld income tax (26 U.S.C.A. 3402) and Federal Insurance Contributions
Act tax (F.I.C.A.) (26 U.S.C.A. 3102) in relation to wages earned prior to but
paid after the initiation of bankruptcy proceedings and (b) for employers'

F.I.C.A. taxes (26 U.S.C.A. 3111) and Federal Unemployment Tax Act taxes
(F.U.T.A.) (26 U.S.C.A. 3301) in relation to such wages. Appellees, trustees,
cross-appeal challenging their liability for payment of the taxes, the priority to
be afforded the tax claims, and the necessity of the United States to file a proof
of claim for the taxes. A brief recitation of the proceedings had may prove
helpful in placing the controversy in focus.
2

Two unrelated companies fell into bankruptcy in early 1970. In each instance
the trustee's final report queried the trustee's liability for the aforementioned
taxes. The bankruptcy judge thereafter categorized the wage claims as priority
wage claims1 under Section 64(a)(2) of the Bankruptcy Act (Act) (11 U.S.C.A.
104(a)(2) ) or as general unsecured wage claims. After doing so, the
bankruptcy judge ruled in each case that the trustees were: not liable for the
F.I.C.A. and F.U.T.A. taxes imposed on the employer by 3111 and 3301,
respectively, for the priority wage claims; not liable for the same F.I.C.A. and
F.U.T.A. taxes imposed on the employer for general unsecured wage claims
because the United States had failed to file a proof of claim for such taxes; not
liable for withholding the employees portion of the withheld income and
F.I.C.A. taxes imposed by 3402 and 3101, respectively, for general
unsecured wage claims; but that trustees were liable for withholding the
employee's portions of the withheld income and F.I.C.A. taxes for priority wage
claims.

On appeal, the district court initially observed that the bankruptcy court had
correctly determined that the trustee was liable for the employees' portion of
the withheld income and F.I.C.A. taxes for priority wage claims in accordance
with the mandate of Otte v. United States, 419 U.S. 43, 95 S.Ct. 247, 42
L.Ed.2d 212 (1974), and that, accordingly, those taxes were not in issue on
appeal. The district court then proceeded to consider each of the four taxes in
issue relative to (a) the trustee's liability, (b) the priority to be afforded the
claim if liability was present, and (c) whether the United her the United States
must file a formal proof of claim.

After considering the four taxes in the above-mentioned manner, the district
court held that the trustees were liable for the F.I.C.A. and F.U.T.A.2 taxes
imposed on the employer by 3111 and 3101, respectively, for both priority
wage claims and general unsecured wage claims, and that the trustees were also
liable for the employees' portion of the withheld and F.I.C.A. taxes imposed by
3402 and 3101 for general unsecured claims. In addition to finding the
trustees liable for all the taxes in question relative to wages accrued prior to but
paid after the commencement of bankruptcy, regardless of their classification as
priority or general unsecured wage claims, the district court held that the

United States need not file a proof of claim for the taxes. The court further held
that the taxes would not be afforded a priority under the Act and should be
"accorded the same priority as all other general unsecured claims pursuant to
the proviso of 64(a)(4)" of the Act.
5

On appeal, United States argues that the trustees are liable for the payment of
all the taxes in question, that it is not required to file proof of claims with
respect to taxes relating to wage claims, that the taxes are entitled to the status
of first priority debts under 64(a) of the Act, and that the district court erred in
ruling otherwise. Trustees, in their cross-appeal, contend that the district court
erred in finding them liable for the taxes and in finding that the United States
was not required to file proofs of claim. We will treat the trustees' claims first.

I.
6

This appeal involves a case of first impression brought by United States to

achieve a degree of certainty relative to the liability of trustees in bankruptcy
for wage claim related taxes. The district court was, however, aided by Otte v.
United States, supra, in limiting the issues to be determined:

7 is important to note first what is not at issue here. The bankruptcy court held that
It
the trustee in each case was liable for the taxes ordinarily withheld by an employer
from the employee's wages i. e., the employee's income tax on his wages and his
share of FICA. This holding was required by the Supreme Court's recent opinion in
Otte v. United States, 419 U.S. 43, (95 S.Ct. 247, 42 L.Ed.2d 212) (1974) and is not
challenged here. In Otte the Court held that either the bankruptcy judge or the
trustee was an "employer" under 3401 and 3101 of the Internal Revenue Code
and was responsible for withholding those taxes on the 64(a)(2) priority wage
claims. Id. at 51, (95 S.Ct. 247). There, as in these two cases, the wages had been
earned prior to the filing of the bankruptcy petition but had not been paid prior to
that time. The Government did not need, according to Otte, to file a proof of claim
for these taxes since "(l)iability came into being only during bankruptcy." Id. at 55
(95 S.Ct. 247).
8(R., Vol. II, p. 134.)
9

Trustees argue collectively that they are not liable for: (1) the employer's
portion of F.I.C.A. taxes on priority wage claims because the taxes are excise
taxes, added increments, and that no employment relationships were established
or maintained between trustees and wage claimants; (2) the payment of
F.U.T.A. taxes on priority wage claims because they are excise taxes. Trustees
contend that F.U.T.A. taxes are different from the other taxes herein, and

should not be considered in pari materia with them because the employees are
protected by a bankrupt's unemployment coverage and that if the employees
obtain new employment they will be covered by their new employer(s).
Trustees argue that the few dollars which might be garnered by holding them
liable for F.U.T.A. do not justify the extra time and manpower necessary to
calculate credits; (3) the employer's portion of F.I.C.A. taxes or for F.U.T.A.
taxes on general unsecured wage claims because the wages to which these
claims are traced have lost their identity as wages and are simply part of the
general mass of unsecured non-priority claims. Trustees also contend that they
are not employers for these kind of added increment taxes; and (4) that trustees
are not liable for withholding the employees' portion of withheld income and
F.I.C.A. taxes on general unsecured wage claims because there is no reason
that these wages should retain their character as wages, but rather, that they
should be considered the same as any other trade creditor claim. Trustees argue
that these claims should not be withheld since to do so would dilute funds
available for general creditors.
10

It is undisputed that all employers are statutorily required to pay or withhold

the taxes at issue herein.3 Thus, the pivotal question on the issue of liability
comes down to the degree to which a trustee is required to function as an
employer in paying and withholding wage claim related taxes.

11

In Otte v. United States, supra, relied upon by the trial court, the Court held
that a trustee is obligated to withhold and pay the employee's withheld income
tax and the employee's share of F.I.C.A. taxes for priority wage claims.
Although not deciding the issues immediately before us, the Court did opine
generally relative to a trustee's withholding responsibility:

12
Every
Court of Appeals which has faced the issue, including the Second Circuit in
the present case, has held, contrary to the ruling of the referee, that the withholding
provisions of the Internal Revenue Code, and of state or municipal tax statutes,
require that a trustee in bankruptcy withhold income and social security taxes from
payments of wage claims, and that he prepare and submit to the wage claimants, and
to the taxing authorities the reports and returns statutorily required of employers.
United States v. Fogarty, 164 F.2d 26, 30-33 (CA8 1947); United States v. Curtis,
178 F.2d 268, 269 (CA6 1949), cert. denied, 339 U.S. 965, 70 S.Ct. 1001, 94 L.Ed.
1374 (1950); Lines v. California Dept. of Employment, (9 Cir.) 242 F.2d 201, 202,
reh. den., 246 F.2d 70 (CA9), cert. denied, 355 U.S. 857, 78 S.Ct. 86, 2 L.Ed.2d 64
(1957); In re Connecticut Motor Lines, Inc., 336 F.2d 96 (CA3 1964). To the same
effect is In re Daigle, 111 F.Supp. 109, 111 (Me.1953). (Emphasis supplied.) 419
U.S., at p. 48, 95 S.Ct., at p. 252.

13

The Court also opined relative to a trustee's liability:

14 payment of the wage claims is thus "payment of wages" under 3402(a) of the
The
Internal Revenue Code.
15 fact that in bankruptcy payment of wage claims is effected by one other than the
The
bankrupt former employer does not defeat any withholding requirement. Although
3402(a) refers to the "employer making payment of wages," 3401(d)(1), as also
has been noted, provides that if the person for whom the services were performed
"does not have control of the payment of the wages for such services," the term
"employer" then means "the person having control of the payment of such wages."
This obviously was intended to place responsibility for withholding at the point of
control. The petitioner trustee suggests that control rests in the referee rather than in
the trustee, because of the former's duty, under 39a(5) of the Act, 11 U.S.C.
67(a)(5), to "declare dividends." We need not determine whether it is the trustee,
with his responsibility, under 47a(8) and (11) of the Act, 11 U.S.C. 75(a)(8)
and (11), for making recommendations and actual payments, or the referee, with his
supervision over the general administration of the bankrupt estate, or the estate itself,
that has "control of the payment of such wages," within the meaning of 3401(d)(1)
of the Internal Revenue Code. One of them is the "employer" and, as such, has the
duty to withhold or to order that withholding, as the case may be. An "employer,"
under 3402(a), is thus present. (Emphasis supplied.)
419 U.S., at pp. 50-51, 95 S.Ct., at p. 253.
16
17

The Otte opinion further observed not only that " 'employer' then means the
person having control of the payment of such wages" under 3402 for the
purpose of withholding employees' income tax but that "The fact that the FICA
withholding provisions of the Code do not define 'employer' is of no
significance, for that term is not to be given a narrower construction for FICA
withholding than for income tax withholding." 419 U.S., at p. 51, 95 S.Ct. at p.
253.

18

Applying the guidelines in this format we conclude that the district court did
not err in finding the trustees liable for withholding and payment of the taxes
here in issue. Trustees' arguments that F.I.C.A. and F.U.T.A. taxes are excise
taxes for which a trustee is not liable are without merit, as is the argument that
liability is not present because an employer-employee relationship did not exist
between the employees of the bankrupts and the trustees. We also do not see
merit in trustees' assertions that (a) the liability imposed relating to their
declared withholding obligations do not justify the extra time and manpower
needed in bankruptcy proceedings and, (b) that the general unsecured wage

claims lose their identity as wages and should not be given treatment in
variance with other general unsecured claims. We believe that the contentions
of the trustees are directed to the wrong branch of government. This was well
expressed in Otte :
.19. . If relief is to be considered for bankrupt estates in this respect, it is a matter for
legislative, not judicial, concern. There is nothing in the Act or in the Internal
Revenue Code that relieves the trustee of these duties. ("tasks of withholding,
reporting, returning, and remitting") . . .
419 U.S., at p. 54, 95 S.Ct. at p. 255.
20
21

Trustees have not directed our attention to any authority, statutory, regulatory,
or otherwise, nor has our independent research disclosed a valid, viable
argument for excusing trustees from their liability to withhold and pay the wage
related taxes. Had Congress desired to relieve trustees of the liabilities of
withholding and paying under the circumstances of this case, it could have
easily done so. Under these circumstances, we do not opt to read into the
relevant statutes that which is not clearly present, since to do so "would involve
judicial activism into a political, legislative and/or executive area." See Carlson
v. Landon, 342 U.S. 524, 72 S.Ct. 525, 96 L.Ed. 547 (1952). That trustees are
liable for wage claim related taxes is consistent with the purpose of Congress to
enable employees displaced by bankruptcy to secure, with some promptness,
money due in back wages. United States v. Embassy Restaurant, 359 U.S. 29,
79 S.Ct. 554, 3 L.Ed.2d 601 (1959). No less a standard should be afforded to
the taxes generated by the wage claims.

II.
22

Trustees contend, that with the exception of the claims for the employee's
withheld income and F.I.C.A. taxes on general unsecured wage claims, that the
United States must file a claim for the taxes here in issue. Trustees argue that
this is particularly true for excise taxes which are "not included in gross wages
earned and unpaid" and that notice is therefore essential. Trustees contend this
is necessary since many trustees are not sophisticated businessmen and that
without the benefit of notices excise taxes such as these are often overlooked.

23

United States argues, contra, that filing proof of claims would serve no useful
purpose since the wage claims giving rise to the taxes in question are already
before the trustees, in that the taxes arise only when the wages are paid by the
bankrupt's estate; and that since the taxes are debts of the bankrupt's estate, and
not of the bankrupt, there is no need of filing proofs of claim prior to payment

made by the trustees in the course of their administration of the estate.

24

Otte considered the necessity of filing proof of claims for the employees
withheld income and F.I.C.A. taxes on priority wage claims:

25 trustee asserts that because the United States and the city failed to file proofs of
The
claim for the taxes at issue, payment thereof is barred. It is said that these taxing
entities were on notice, by reason of Freedomland's bankruptcy schedules, that the
bankrupt owed the priority wage claims; that these claims were to be filed within six
months; that the entities could obtain an extension of time, under 57n of the Act,
11 U.S.C. 93(n), in which to compute and file their claims; and that they chose to
ignore the referee's bar order directed, among others, to "taxing authorities and
agencies," App. 24a.
26 argument, in our view, misconceives the nature of the taxes that are to be
This
withheld. Liability for the taxes accrues only when the wage is paid. Sections
3402(a) and 3101(a) of the 1954 Code; New York City Administrative Code
T46-51.0(a) and U46-8.0. The wages that are the subject of the wage claims,
although earned before bankruptcy, were not paid prior to bankruptcy. Freedomland
had incurred no liability for the taxes. Liability came into being only during
bankruptcy. The taxes do not partake, therefore, of the nature of the debts of the
bankrupt for which proofs of claim must be filed. (Emphasis supplied.)
419 U.S., at pp. 54-55, 95 S.Ct. at p. 255.
27
28

The key language, we believe, in the above-quoted portion of Otte is that the
"taxes do not partake, therefore, of the nature of the debts of the bankrupt for
which proofs of claim must be filed." We deem it noteworthy that the Supreme
Court did not differentiate between the withheld income taxes and the "added
increment" "excise" taxes for F.I.C.A. contributions. Significant, too, is the fact
that the Court's comments are directed only to taxes as debts without cross
referencing or elaborating on taxes as debts relative to priority wage claims and
general unsecured wage claims. To be sure, Otte was not concerned with
general unsecured wage claims. Even so, the opinion, particularly the abovequoted portion, does, we believe, lend credence to the proposition that the
Court would have reached the same result for general unsecured wage claims.
We are so persuaded because the pivotal factor is limited to the proper nature of
wage claim taxes as bankruptcy debts and not in relation to the genesis of the
wage claims giving rise to the taxes and debts. Under these circumstances, we
do not believe that Otte may be logically extended so as to include a holding
that the filing of proofs of claims is necessary for all the taxes here in issue.
Accordingly, the district court is affirmed relative to its filing rulings.

III.
29

The United States contends that all wage claim related taxes are entitled to be
considered first priority debts under 64(a) of the Act (11 U.S.C.A. 104(a))
and that the district court erred in not affording priority to such claims. We
disagree. Otte discussed this issue in detail in its determination that the
employees' withheld and F.I.C.A. taxes on priority wage claims are entitled to
the same priority as the wages from which they emerge:

30 withholding taxes thus determined as properly applicable to priority wage

With
claims, their placement in the payment scale under 64a must be determined. The
choice lies between the first priority (costs and expenses of administration), urged by
the United States; the second priority (wages and commissions, limited as the statute
specifies), urged by the city of New York; the fourth priority ("taxes which become
legally due and owing by the bankrupt"), urged by none of the parties here; and no
priority at all. The third and fifth priorities clearly have no possible application to
these taxes.
31 readily reject the fourth priority. The withholding taxes are not taxes which
We
became due and owing by the bankrupt. As has been noted above, the taxes did not
become due and owing at all until the claims, constituting wages, were paid. This
took place after bankruptcy, not before. The situation, thus, differs from that where
the bankrupt paid wages prior to bankruptcy, but the taxes withheld were not
remitted to the taxing entities by the time of the inception of the bankruptcy
proceeding. The latter would be taxes "which became legally due and owing by the
bankrupt." See In re John Horne Co., 220 F.2d 33 (CA7 1955); Pomper v. United
States, 196 F.2d 211 (CA2 1952).
32 similarly reject the first priority, although we recognize that this appears to be
We
the favorite conclusion reached by those courts that have passed upon the issue. See
n. 3, supra. The leading case for this approach is United States v. Fogarty, supra.
The Court there, however, without a statement of underlying reasons, merely
concluded that the taxes "should be allowed and classified as an expense of
administration," 164 F.2d, at 33. In Lines v. California Dept. of Employment, supra,
the court followed Fogarty and held that, because the tax accrued "subsequent to the
filing of the petition in bankruptcy, such tax had the character of an expense of
administration." 246 F.2d, at 71.
33 think that more than a general observation that the taxes arose during
We
bankruptcy is required to dignify withholding taxes with the prime status of first
priority. We grant that the very language of 64a(1) ("including the actual and
necessary costs and expenses of preserving the estate subsequent to filing the
petition") necessarily indicates that first priority items include some in addition to

those that preserve or develop the bankrupt estate. Withholding taxes, however, do
not strike us as costs or expenses of doing business. They are attributable in their
entirety to the availability of funds for the payment of priority wage claims. They
accrue only as those claims are paid and, to the extent of that payment, the payment
of the taxes should be assured. In addition, it is anomalous to accord withholding
taxes a higher priority than the wage claims to which they so directly relate. They
can be computed only upon the amount of funds available for payment of the wage
claims and should not have a computational base greater than those payments. The
withholding taxes are, in full effect, part of the claims themselves and derive from
and are carved out of the payment of those claims. We therefore fully agree with the
Second Circuit's observation, (In re Freedomland, Inc., (2 Cir.) 480 F.2d 184) 480
F.2d, at 190: "Conceptually the tax payments should be treated in the same way as
the wages from which they derive and of which they are a part."
419 U.S., at pp. 55-57, 95 S.Ct. at p. 255.
34
35

Applying these standards to the wages and taxes in issue, we hold that the
district court correctly concluded that the taxes were not entitled to a priority,
particularly in view of Otte's holding that wage claim related taxes are entitled
only to the same priority as the wages from which they emerge. The contention
of the United States that first priority treatment is the only means of assuring
that such taxes are paid and the only feasible administrative treatment of taxes
cannot, therefore, prevail.

36

WE AFFIRM.

Wages and commissions, not to exceed $600 to each claimant, which have been
earned within three months before the date of the commencement of the
proceeding

This liability to be contingent upon the trustee paying $1500 or more in wages
during any calendar quarter in the calendar year, and was remanded for a
determination of same

3402 of the Code and 31.3402(a)1(b) of the Regulations require employers

to withhold income taxes and 3403 of the Code along with 31.3403(1)
require employers to pay the withheld taxes to the United States; 3102 of the
Code requires employers to withhold employee F.I.C.A. taxes and 31.3102-2
of the Regulations requires employers to pay over these taxes to the United
States; 3111 of the Code and 31.3111-4 of the Regulations impose liability
on an employer for the employer's portion of F.I.C.A. taxes and 31.3111-5 of

the Regulations dictates the manner of payment; 3301 of the Code and
31.3301-1 of the Regulations impose liability upon the employer for the
F.U.T.A. taxes